Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- AAON Inc (AAON, Financial) reported record sales, earnings, and backlog for the second quarter of 2024.
- The basics segment saw a significant increase in net sales, up 58.3% year-over-year and 103.7% compared to the first quarter.
- Sales of data center equipment produced at both Oregon and Texas facilities were up 142.4% year-over-year.
- Gross profit increased by 20.3% to $113.1 million, with gross profit margins improving to 36.1% from 33.1% in the second quarter of 2023.
- The company has a strong balance sheet with a current ratio of 3.0 and a leverage ratio of 0.3 times, providing financial flexibility for growth opportunities.
Negative Points
- Near-term visibility is limited, with week-to-week orders being volatile, making production planning more difficult.
- The reconfiguration of the production layout within the Redmond, Oregon facility continued to disrupt operations into Q2.
- Selling, general, and administrative expenses increased by 16.9%, primarily due to investments in technology, professional and legal fees, increased travel, and consulting expenses.
- The transition to new refrigerant regulations has created disruptions and increased volatility in bookings.
- The macro environment has become more challenging, with softening construction activity and interest rate concerns impacting the rooftop business segment.
Q & A Highlights
Q: What is driving the stronger sales in Q4 compared to Q3?
A: It is primarily due to production capacity coming on board for data centers. Orders for rooftop units have been steady but not significantly increasing. The data center bookings have been tremendous, but there will be a struggle to get any material amount built in Q3 due to parts and production facilities. The facilities are coming along nicely and on schedule.
Q: Are you planning to increase data center capacity further beyond Oregon and Texas?
A: The additions in Oregon will provide considerable productive capacity. The new addition in Longview, Texas, which is 245,000 square feet, is currently 100% allocated to data centers due to the pipeline of work and backlog.
Q: Can you get back to the 34% operating margin range in Q3 or is that more of a Q4 target?
A: Q3 still has some headwinds, including productivity challenges and outsourcing costs due to the rearrangement of fabrication equipment. We expect to get back towards the normalized margin profile in Q4 and beyond.
Q: What is the big risk with the transition to the R-454B refrigerant equipment?
A: The risk is that customers may buy R-410A and not move quickly to the new systems. We cannot ship current refrigerant beyond December 31st, and many states have not yet put building codes in place to allow the utilization of R-454B. This could cause a surge in R-410A equipment orders towards the end of the year.
Q: How will the basics growth rate trend in Q3 and Q4, and into 2025?
A: Q3 will see a deceleration in growth, with a significant backlog conversion expected in Q4 as production capacity comes online. The growth rate should accelerate into 2025 as production capacity ramps up.
Q: Can you give an update on the tailored and sticky retention opportunities in the data center market?
A: We have developed custom-engineered solutions for data center customers, particularly in the liquid cooling space. This collaboration is driving continued OEM pipeline visibility and backlog conversion.
Q: How are you thinking about M&A these days?
A: We currently have nothing in the pipeline. The basics acquisition was very strategic, and we have not found anything else that fits us in a strategic manner. We keep our ear to the ground and listen to multiple investment bankers, but we have no reason to purchase anyone at the moment.
Q: How are you managing the volatility in the rooftop business in the back half of 2024?
A: We are running at a rate that allows us to maintain margins. If bookings don't strengthen soon, we will have to make adjustments. We are not at a point of making that decision yet, but we are prepared to manage through the volatility.
Q: How are you approaching pricing for the R-454B refrigerant equipment?
A: We currently have great margins with minimal pressure. If competitors increase prices by 8-10%, our premium largely goes away, making our equipment more attractive. We have empirical data to support our pricing analytics and are confident in our competitive position.
Q: Can you discuss your competitive position in the liquid cooling market for data centers?
A: Our ability to custom tailor solutions to applications and the evolving market around AI is positioning us strongly. We have a strong relationship with existing and new customers, and our engineering know-how is driving value. The market is evolving in a way that benefits our basics products, and we expect continued growth in this segment.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
